Corn’s 2-Year High Fails to Curb Ethanol Profit: Energy Markets

The highest corn costs in two years are failing to dent profits for U.S. ethanol producers as demand grows and prices for the biofuel and a byproduct used for animal feed increase.

Plants in Iowa are making an average 27 cents for every gallon of fuel produced, compared with a loss of 6 cents as recently as July, according to Ag Trader Talk, an online grains- information service in Clive, Iowa. Mills in Illinois are making about 25 cents, up from a loss of 2 cents, it said.

A combination of increased ethanol usage, higher prices for dried distillers grains -- a byproduct of the fermentation process -- and natural gas costs near a 13-month low are benefitting ethanol refiners. The fuel jumped 20 percent this year, the second-best energy investment after coal, which has gained 35 percent. Corn, the main feedstock, rose 40 percent.

“If you’re not making money in ethanol right now, you have a problem with your production process,” said Jason Ward, an analyst at Northstar Commodity Investments LLC in Minneapolis. “They’ve got three of the four main components working in their favor.”

Denatured ethanol for November delivery, the benchmark contract, rose to $2.339 a gallon on the Chicago Board of Trade, the highest price since Aug. 29, 2008. Futures gained 47 percent since July 14. Corn climbed to $5.82 a bushel on the CBOT. The grain traded at $5.88 on Oct. 13, the most since Aug. 29, 2008.

Higher Prices

Dried distillers grains, which are used by feedlots and dairy farmers, have soared 43 percent to $146.50 a ton in Iowa, according to U.S. Agriculture Department data. They touched $148.50 on Oct. 15, the highest price since Sept. 2, 2008. Natural gas, used as a power source to produce ethanol, has declined 28 percent to $4.038 per million British thermal units on the New York Mercantile Exchange.

“Margins are phenomenal right now,” said Chris Manns, an analyst and co-founder at Chicago Traders Group. “These are the best they’ve seen in a while. It’s almost a case of: we don’t mind $6 corn as long as ethanol stays above $2.”

Ethanol is made by fermenting starches from corn to create an alcohol similar to moonshine. Under a 2007 energy law known as the Renewable Fuels Standard, or RFS, the U.S. requires petroleum refiners to use 12 billion gallons of the fuel this year and 15 billion gallons by 2015. Blending with gasoline rose 8.5 percent since June to a record 817,000 barrels a day in the week ended Oct. 22, Energy Department data show.

“The numbers don’t lie,” Ward said. “The one thing that has been constant every week is we’re using more ethanol than we did a year ago.”

Corn Crop

Corn has surged as the government slashed yield forecasts. Farms will produce 155.8 bushels an acre, the Washington-based Agriculture Department said Oct. 8, compared with an August estimate of 165 bushels.

Oil refiners had expected to pay less for ethanol earlier this year on optimism a stronger corn crop would curb the costs of producing the fuel, according to Harry Boyle, an analyst at Bloomberg New Energy Finance.

“Blenders remain obliged to mix the fuel with gasoline due to the RFS and they appear to have been waiting for the corn price to fall away after encouraging harvest reports,” Boyle said in an interview in London.

Ethanol demand has also been driven by blending incentives that expire at the end of this year. The government pays a 45- cent tax credit to refiners for every gallon that’s mixed with gasoline while imposing a 54-cent tariff on Brazilian imports of the fuel.

The tax credit allows blenders to pocket the difference between gasoline and the biofuel. Ethanol traded at a 23.45-cent premium to reformulated gasoline on the New York Mercantile Exchange today.

Blending Margins

There are 204 ethanol distilleries in the U.S. with the capacity to produce 13.8 billion gallons of the fuel annually, according to the Renewable Fuels Association in Washington, the industry’s largest trade organization.

“There’s a misconception among the general public and a lot of people in the financial community,” said Mark Marquis, president of Marquis Energy LLC, which operates a 110-million gallon plant in Hennepin, Illinois. “They assume if corn goes up life must be terrible for the ethanol producer and that’s not the case.”

To contact the reporters on this story: Mario Parker in Chicago at mparker22@bloomberg.net; Leela Landress in Houston at llandress@bloomberg.net

To contact the editor responsible for this story: Dan Stets at dstets@bloomberg.net

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